By: Mark Glennon*
To grasp the real scope of the Illinois pension catastrophe, think hard about what the state said about itself in court this month, which has gone all but unreported. The governor and others in Springfield may want to talk to the attorney general to get their story straight.
Take the facts asserted by Illinois’ Attorney General in the pension litigation, add a few more facts that aren’t disputed, and it’s clear as day that the entire dialog in Illinois about pension reform is just plain nuts. This is great context to step back and review where the pension debate in Illinois truly stands.
First, some background and a summary of what the A.G.’s court documents say on their face. In a series of court filings this month, Illinois Attorney General Lisa Madigan laid out the facts on behalf of the state to support the “police powers” argument in the lawsuit challenging the constitutionality of SB1, the reform bill for the state’s own pensions. That’s the legal theory that the state’s financial crisis is so dire that the constitutional prohibition of pension cuts should be disregarded. Raising taxes or cutting services instead of cutting pensions would be so harmful that we should forget what the constitution says expressly — that’s the concept.
The state’s court documents incorporate the work of several economists hired as witnesses who have been reviewing the state’s predicament. Those economists are excellent ones, I was told earlier, and it indeed appears from the A.G.’s filings that they have done a great job with what they were told to do.
The state used their work to make, generally speaking, most of the same points that financial realists and pension critics have been saying all along: that Illinois is uncompetitive because of high taxes; pension costs have meant slashed services for the needy; and increasing taxes or cutting services instead of implementing SB1 would worsen the flight of employers from the state and devastate the poor.
The state’s economists get specific. Raising taxes instead of making the pension cuts under SB1 would require an additional $1.3 billion from taxpayers every year. That would reduce economic activity in Illinois by 1.1% and cost the state 64,000 jobs.
Now, keeping in mind that SB1 would reduce the unfunded liabilities of just four of the state’s pensions by $20 billion (the state’s own number), lets put the state’s argument in perspective and see what it really means.
The state’s case and its economists’ analyses do not yet incorporate the recent addition to the unfunded liability of $50 billion resulting from the Kanerva decision. That decision by the Illinois Supreme Court said healthcare benefits are part of the constitutional pension protection. Previously, they were assumed to be discretionary. And Kanerva applies to the other 670 local pensions beyond the state pensions the A.G. is arguing about. That’s another $15 – $20 billion. So, regardless of what happens to SB1, the financial hit from Kanerva alone exceeds the dire consequences outlined by the state by over 300%.
The state did not have its economists consider the burden of the state’s 670 other pubic pensions. That’s nuts, because the same taxpayers and employers are on the hook for those (though the distribution of the burden may vary). As Chicago’s CFO recently said, it’s the “layering effect” of local pensions that are in at least as bad shape as the state’s pensions that makes Chicago “unique” among big cities with pension problems. The ten pensions for Chicago alone had a total unfunded liability of $37 billion as of the end of 2012, and much higher now. Smaller municipalities have the same issue. Suburban and downstate police and fire pensions are short another $8 billion or so, plus another $5 billion for IMRF, a statewide pension.
The state used only its official numbers to make its case, which grossly understate the scope of the problem. As dozens of articles on this site have shown, the state’s official numbers are garbage, yet the A.G used those official numbers in it’s filings. According to Moody’s, the state’s pension deficit was $187 billion at last count, not $97 billion according to the official number used by the A.G. Those 670 other public pensions likewise are far worse off than advertised.
These conclusions should be clear so far:
• The dire consequences the state says will result if SB1 is struck down are certain to occur, in spades, irrespective of what happens to SB1.
• Political leaders in Springfield should talk to their Attorney General to get their story straight. Plenty of them continue to claim Illinois’ crisis is overblown. Illinois’ “comeback” is a central theme of Governor Quinn. Senate President John Cullerton, who is behind the “I like Illinois” campaign, continues to claim our problems are mostly a PR issue. Will somebody please ask Lisa Madigan to square all that with her sworn court filings? And will Governor Quinn please talk to the state’s own economists about the effect of the tax increase he has pledged to pass in the lame duck session this Fall?
• The debate now consuming the state over “what happens if SB1 is struck down” has little point. It’s a false narrative that Illinois has been suckered into believing. When SB1 is struck down pols will blame the consequences on the courts. Expect our press to go along with that narrative, even though worse consequences are certain despite the courts.
Returning to the express content of the A.G.’s filings, several more things are notable:
The economists went to some length documenting why budget cuts instead of pension cuts would be especially hard on Illinois’ most vulnerable. Even respecting the flight of employers from Illinois, they point out, no doubt correctly, that it’s not the big corporate headquarters with well paid executives that are most subject to flight. Instead, it’s the manufacturers and transportation companies providing living wage jobs that are most at risk.
It’s about time that point got some attention. The pension debate is usually framed in class warfare terms – it’s the rich folks trying to cut pensions versus the working stiffs trying to protect them. Hogwash. The group hurt most is the working class in the private sector, and their plight has gone unheard.
Among the reasons why pension liabilities have skyrocketed over the years, according to the economists, is that the state’s actuaries were surprised that people are living longer than they expected. No, really. Our article earlier about some municipal pensions using 50-year old mortality data got national attention, and we’ll be trying to get more details about what the economists were referring to about the state pensions.
Which leads to the final point that’s nuts in itself and emblematic of much of what’s wrong in Illinois. Despite three requests to the Attorney General’s office, I wasn’t given copies of the actual reports prepared by the state’s economists. Instead, they sent just the three main pleadings that summarize those reports. (Those three main pleadings are linked here, here and here.)
Those economists’ reports should be readily available to the public and the media should be all over them.
The state’s own hired economists have documented why the pension crisis is so bad that it trumps the written words of the constitution, yet nobody reports on what those economists said even as pols brag about a comeback?
Neither the A.G. nor some other agency sees fit to post the reports?
The only alternative is to go to the court in Springfield and request a copy. That, too, is crazy. I have been accessing court-filed documents outside Illinois for years by internet.
Memo to the A.G.’s office: We taxpayers paid for those economists’ reports and we want to see them. Please post them or email them.
*Mark Glennon is founder of WirePoints.